By offering affordable and decent beverages, cozy and well-furnished spaces, great WiFi connections, plus a uniform service standard no matter where you are on Earth, Starbucks has come a long way since opening its original Pike Place store in Seattle. Its mermaid logo is recognizable around the world, and for some its name is synonymous with coffee. In China, however, two decades of Starbucks’ operations in the country has done little to nudge local habits in its favor. Average coffee consumption per capita remains low.
Yet local food and beverage labels recognize that Starbucks’ business model is sound, and have made it their own for other menus, like for tea.
Founded in 2015, Nayuki has won over millions of Chinese consumers with its “new-style tea drinks”—a blend of fresh tea, milk foam, and fruit chunks served in a to-go bottle that is designed to keep lipstick stains off its rim. While coffee chains like Starbucks, Tim Hortons, and Luckin struggle to find their way in a country where tea is favored over coffee, Nayuki is brewing up an IPO in Hong Kong at a time when it racked up net losses to the tune of RMB 27.5 million (USD 4.26 million) in the first nine months of 2020.
Brewing a new beverage for hip, young customers
First things first: what are “new-style tea drinks”?
These aren’t your grandparents’ tea. Nayuki’s menu items are served chilled, with the flavors of tea, milk, fruit, cheese, and other add-ons mingling. Unlike milk tea brands that were popular in the early 2010s, like Royaltea and Coco, “new-style tea drinks” are made using fresh brewed tea rather than powdered milk tea.
“New-style tea drinks” took off in 2016 or so, and brands like Nayuki and Heytea became frontrunners after raising multiple investments, according to a research report co-published by 36Kr and Nayuki in 2019.
With each beverage priced above RMB 20 (USD 3.10), these brands’ repeat customers tend to have slightly more disposable income than consumer segments targeted by other milk tea shops. Nayuki and Heytea’s drinks are more likely to be found in the hands of young white-collar workers in metropolitan areas. Their natural and fresh ingredients fit the younger generation’s pursuit of a healthier lifestyle.
The ‘third place’—home, work, Nayuki
Like Starbucks, Nayuki builds its brand image in part through the design details of its stores.
In an interview with KrASIA, Nayuki’s founder Peng Xin said one of her intentions behind starting a tea brand is to provide a space for young elites in Shenzhen, a tech hub in southern China, to meet up, chat about business, and hang out. “We had to make it such that walking into a five-star hotel with either a cup of milk tea or a Starbucks coffee would be equally representative of a certain quality of life.”
However, the COVID-19 pandemic has dampened people’s interests in teahouse gatherings. In October 2020, only 22% of Nayuki’s orders were placed through its in-store cashiers. That means 78% of the chain’s orders were routed through online channels, according to the company’s data. That share was 46% in 2019, said the 36Kr report.
To fit these changes, Nayuki launched its Nayuki PRO subline of stores in November 2020—two months before filing its prospectus—to “achieve broader customer coverage, and increase operational efficiency.” This new type of teahouse is usually located in high-traffic venues and has a smaller footprint, fewer staff members, and equipment that is less elaborate than its other locations.
Rival Heytea has a similar setup for its Heytea GO subline. These 150 sq m shops now account for 25% of the chain’s total locations, while Nayuki operates only 14 PRO locations out of its 422 branches.
Slimming losses in a tight race
Nayuki is undoubtedly the second biggest new-style tea beverage brand in China after Heytea. These two chains and other peers in the industry face a common dilemma: their products lack differentiation.
From premium brands like Heytea and Nayuki, to more budget-friendly tea shops like Sexytea and Mixue, the chains’ names and store fixtures only provide nominal variations. Their core products are very similar: they’re all blends of tea, fruit, and a few choices of toppings.
Nayuki manages to pull ahead of nearly all other brands by rolling out new products. It has launched over 60 seasonal products since 2018, including wine, coffee, and breakfast services. That’s an average of one new item each week, according to a 36Kr report.
At the same time, Nayuki is opening new stores at a rapid pace, using scale to its advantage. The Shenzhen-based company doubled its number of shops in 2019, and managed to pull off a 30% increase during the pandemic in 2020, according to its prospectus.
The cost? USD 4.3 million in net losses in the first nine months of 2020.
To top it all off, new-style tea drink chains must expend much more effort than coffee chains for quality control. Many of Nayuki’s milk tea ingredients have seasonal restrictions and storage challenges. In fact, this is where Nayuki’s expenses are the heaviest, as recorded in its prospectus.
To maintain the standard of their products, both Nayuki and Heytea own all of their branches. Neither licenses to franchises.
Both brands are constructing moats to gain an edge over competitors and lower operational costs. They are building out their supply chains: Heytea started growing its own strawberries in 2020, while Nayuki is reportedly involved in tea and fruit farming as well, according to a report by 36Kr.